Question

Which of the following statements is correct? rev: 05_15_2018 Multiple Choice Both perfectly competitive and monopolistic firms are price takers. A perfectly competitive firm is a price taker, while a pure monopoly is a price maker. Both perfectly competitive and monopolistic firms are price makers. A perfectly competitive firm is a price maker, while a pure monopoly is a price taker.

Answer 1

The correct answer is the second statement.

Step-by-step explanation:

Perfect competition is the market structure where there is a large number of buyers and sellers. These firms produce homogenous products. This type of market has no restriction on entry and exit of firms in the market. There are so many buyers and sellers that any single buyer or seller is not able to influence the price or output. So, the firms are price takers.

Monopoly is a market structure where there is only a single seller. There is a restriction on entry and exit of new firms in the market. Because of being the only producer in the market, a pure monopoly firm is able to fix price on its own. So, it faces a downward-sloping demand curve. The price and output are determined at the point where marginal revenue is equal to marginal cost.